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Enron Mail |
Below is a concept to perhaps solve the problem confronting EES and the Ohio
market. It is a work in progress so suggestions and troubleshooting are welcomed. Problem - There is uncertainty about EES's ability to pursue what had been perceived as value propositions in the Columbus Southern Power (AEP) and Cinergy markets because of changes in our price curves. These changes reflect the difficulty of offering a physical product due to concerns regarding load following and imbalances. Proposed Solution - Negotiate a power swap with AEP and/or Cinergy. How the Proposal Works - Under the proposal, EESI would enter into a contract with the customer to deliver power below the shopping credit, thereby offering savings to the customer. EESI would then enter into a contract with AEP to provide the power including load following as it currently does (similar to the market support generation concept). EESI could agree to pay AEP a modest sum (a few mils/kwh, for example) as an incentive to do the deal. EESI would also enter into a contract with ENA to procure on- peak and off- peak replacement power for AEP at a cost equal to or less than the price EESI is charging to its customer, minus a percentage or millage which would be EESI's profit on the deal. ENA would contract with AEP to provide the on-peak and off-peak power in the same quantities as AEP is providing to EESI customers. The term of the deal would be a maximum of five years of until the RTO adequately addresses load following, whichever comes first. The amount of the capacity swap could be limited to either a certain megawatt amount or be up to the amound required to get AEP to its 20%. Why AEP Might Consider the Deal - Currently, there is no customer switching in the AEP service territory. Under SB 3, if less than 20% of the customers switch by the end of 2003, then the Commission must initiate a proceeding to address why. The expected outcome would be to raise the shopping credit, which probably would not be an outcome AEP would seek. If no switching continues to be the issue, the Commission could take action sooner. Also, under SB 3, if 20% of customers switch, anytime after mid-2003, any party, including the utility, can petition the Commission to go to market based rates and end the market development (transition) period. It is my belief that AEP will want to end the market development period as quickly as possible for two reasons. First, they have very little stranded generation assets and will have probably recovered them by some time in 2003. Their Regulatory Asset Charge (which is where all there stranded costs really are) is a surcharge that they will be allowed to recover irrespective of when the Market Development Period ends. The most compelling reason for AEP to consider this proposal is that market prices are high and AEP is unable to take advantage of market conditions to the degree that they would probably like because their resources are dedicated to providing default power at low rates. This proposal would give them a mechanism to free up generation to sell in the competitive market and earn a higher return. Finally, the swap leaves AEP somewhat indifferent and the millage adder, EESI could add to the deal is just extra profit for them. Benefits to EESI - EESI gets to do its deals, make a profit and get a strong foothold in the Ohio market. EESI also gets a competitive edge over other marketers by securing physical capability. Third, by moving AEP more quickly to market- based rates, this adds uncertainty in the market which Enron thrives on. Fourth, once AEP goes to market-based rates they are required to conduct a competitive bid for default service. This could potentially accelerate by as much as two and a half years, the opportuntity for an EESI play as the default service provider. Benefit to ENA - This provides ENA a large, longterm wholesale transaction. ENA's profit would be the difference between what EESI pays ENA (as described above) and the price at which it procures the power. Benefit to Customers - The customers get the benefit of lower rates and savings that are measured as the difference between the shopping credit and the price negotiated with EESI. They are indifferent as to the source of the power. Next Steps - Assuming this looks like an idea that can work, I would set up a lunch meeting with Rich Munzinski, Senior VP who negotiated the settlements to explore this concept with him. Rich is very practical and very bottom-line oriented. If he thinks this is good for AEP, he might be willing to carry the water internally on this. Judging from several years of negotiating with him in Ohio and elsewhere, I think there is a reasonable chance he would be receptive. I could also arrange a similar meeting with Jim Gainer, VP, legal counsel for Cinergy in the settlements. I have a good relationship with Jim and find him to be practical and straightforward. If he thinks this has merit, he will take it up with Jim Turner, president of Cincinnati Gas and Electric Company, who I also have a good relationship with, although not as close. Please let me know your thoughts and suggestions. Thank you, Janine
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